Asymmetry of cross correlations between intra-day and overnight volatilities

TL;DR

This paper reveals a significant time asymmetry in the cross correlations between intra-day and overnight stock volatilities, showing that overnight volatility predicts next-day intra-day volatility, but not vice versa.

Contribution

It uncovers a robust and simple asymmetry in cross correlations of volatilities, highlighting predictive relationships in stock market volatility dynamics.

Findings

Overnight volatility positively correlates with next-day intra-day volatility.

The asymmetry in correlations is robust across different conditions.

The effect is simple and not previously well documented.

Abstract

We point out a stunning time asymmetry in the short time cross correlations between intra-day and overnight volatilities (absolute values of log-returns of stock prices). While overnight volatility is significantly (and positively) correlated with the intra-day volatility during the \textit{following} day (allowing thus non-trivial predictions), it is much less correlated with the intra-day volatility during the \textit{preceding} day. While the effect is not unexpected in view of previous observations, its robustness and extreme simplicity are remarkable.